Alaska Air Group reports third quarter 2021 results

Rhea-AI Summary

Alaska Air Group (ALK) reported strong third-quarter 2021 results, achieving a net income of $194 million ($1.53 per share) compared to a net loss of $431 million in Q3 2020. The company boasts a 12% pretax profit margin, significantly exceeding analyst expectations. Key metrics include a 51% debt-to-capitalization ratio, with $3.2 billion in unrestricted cash. Operationally, Alaska exercised options for 12 Boeing 737-9 aircraft and opened a new lounge in San Francisco. Notable ESG initiatives include appointing a Google executive to the board and forming Alaska Star Ventures to target carbon neutrality.

Positive

• Achieved net income of $194 million in Q3 2021, a strong recovery from a $431 million loss in Q3 2020.
• Reported a 12% pretax profit margin, leading the industry.
• Maintained $3.2 billion in unrestricted cash and marketable securities.
• Reduced debt-to-capitalization ratio from 61% to 51%.
• Continued expansion with new aircraft options and lounge openings.

Negative

• None.

SEATTLE, Oct. 21, 2021 /PRNewswire/ -- Alaska Air Group (NYSE: ALK) today reported financial results for its third quarter ending Sept. 30, 2021, and provided outlook for the fourth quarter ending Dec. 31, 2021.

The third quarter marks a significant stride forward in Alaska Air Group's path to recovery. Alaska's goal from the beginning of the pandemic has been deliberate - scaling the business back up in a measured way, leveraging the company's strong balance sheet, and running a resilient operation, all with the aim of producing consistent industry-leading financial performance.

"We are thrilled to return to profitability this quarter, leading the industry with a 12% pretax profit margin," said CEO Ben Minicucci. "Thanks to each one of our employees for running our operation and showing remarkable care for our guests, and credit to the leadership team for laying out a measured plan and executing it with discipline. We're all feeling the momentum and look forward to building on our strong foundation for growth in 2022 and beyond."

Financial Results:

• Reported net income for the third quarter of 2021 under Generally Accepted Accounting Principles (GAAP) of $194 million, or $1.53 per share, compared to a net loss of $431 million, or $3.49 per share in the third quarter of 2020.
• Reported net income for the third quarter of 2021, excluding special items and mark-to-market fuel hedge accounting adjustments, of $187 million, or $1.47 per share, compared to an adjusted net loss of $399 million or $3.23 per share, in the third quarter of 2020. This quarter's adjusted results compare to the First Call analyst consensus estimate of $1.30 per share.
• Generated adjusted pre-tax margin for the third quarter of 2021 of 12%.
• Reported a debt-to-capitalization ratio of 51%, a reduction of 10 points from Dec. 31, 2020.
• Made a $100 million voluntary contribution to the defined benefit plan for Alaska's pilots in the third quarter, boosting estimated combined funded status of all defined benefit plans to 94%.
• Held $3.2 billion in unrestricted cash and marketable securities as of Sept. 30, 2021.
• Prepaid $425 million in debt from the 364-day term loan facility, bringing total debt payments to $1.2 billion for the year.

Operational Updates:

• Exercised options for 12 Boeing 737-9 aircraft slated for delivery in 2023 and 2024, and added options for an additional 25 deliveries, bringing Alaska's total firm commitments for 737-9 aircraft to 93 and available options to 52.
• Ratified amended wage agreement for Horizon Air pilots, represented by the International Brotherhood of Teamsters. 
• Opened new San Francisco International Airport Lounge with 9,200 square feet of Bay-Area inspired amenities.
• Announced new nonstop flights between San Francisco and Loreto and Ixtapa/Zihuatanejo, with service slated to begin Dec. 18. Since the onset of the pandemic, approximately 70 new markets have been announced or commenced operation.
• Resumed and expanded inflight meals, snacks, and drinks in all classes of service.
• Continued to exceed internal metrics for guest satisfaction, highlighting our commitment to providing our guests a smooth and safe experience throughout their journey.    
• Near the top of the industry for on-time arrivals and completion rates in the third quarter.

Environmental, Social and Governance Updates:

• Appointed Adrienne Lofton, vice president of global marketing at Google, to the Company's board of directors.
• Announced formation of Alaska Star Ventures, an entity created to identify and further technologies that accelerate Alaska Airlines' path to net zero carbon emissions.
• Supported the Afghan Humanitarian Airlift Mission and the U.S. military by operating Civil Reserve Air Fleet flights in the evacuation of individuals and families from Afghanistan.
• Awarded $260,000 in LIFT Grants to 25 nonprofits focused on a clear vision to provide the next generation of leaders with the knowledge, skills and providing pathways for success through the Alaska Airlines Foundation.

The following table reconciles the company's reported GAAP net income (loss) per share (EPS) for the three and nine months ended Sept. 30, 2021 and 2020 to adjusted amounts.

	Three Months Ended September 30,
	2021								2020
(in millions, except per-share amounts)	Dollars				Diluted EPS				Dollars				EPS
GAAP net income (loss) per share	$	194			$	1.53			$	(431)			$	(3.49)
Payroll support program wage offset	—				—				(398)				(3.22)
Mark-to-market fuel hedge adjustments	—				—				(3)				(0.02)
Special items - impairment charges and other	(9)				(0.07)				121				0.98
Special items - restructuring charges	—				—				322				2.60
Special items - merger-related costs	—				—				1				0.01
Income tax effect of reconciling items above	2				0.01				(11)				(0.09)
Non-GAAP adjusted net income (loss) per share	$	187			$	1.47			$	(399)			$	(3.23)
	Nine Months Ended September 30,
	2021								2020
(in millions, except per-share amounts)	Dollars				Diluted EPS				Dollars				Diluted EPS
GAAP net income (loss) per share	$	460			$	3.64			$	(877)			$	(7.12)
Payroll support program wage offset	(914)				(7.24)				(760)				(6.16)
Mark-to-market fuel hedge adjustments	(68)				(0.54)				—				—
Special items - impairment charges and other	5				0.04				350				2.84
Special items - restructuring charges	(12)				(0.09)				322				2.61
Special items - merger-related costs	—				—				5				0.04
Income tax effect of reconciling items above	242				1.92				20				0.16
Non-GAAP adjusted net loss per share	$	(287)			$	(2.27)			$	(940)			$	(7.63)

Statistical data, as well as a reconciliation of the reported non-GAAP financial measures, can be found in the accompanying tables. A glossary of financial terms can be found on the last page of this release.

A conference call regarding the third quarter results will be streamed online at 8:30 a.m. PDT on October 21, 2021. It can be accessed at www.alaskaair.com/investors. For those unable to listen to the live broadcast, a replay will be available after the conclusion of the call.

References in this update to "Air Group," "Company," "we," "us," and "our" refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified.

This news release may contain forward-looking statements subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements.  For a comprehensive discussion of potential risk factors, see Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2020. Some of these risks include the risks associated with contagious illnesses and contagion, such as COVID-19, general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our indebtedness, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, and changes in laws and regulations. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance, or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse.

Alaska Airlines and its regional partners serve more than 120 destinations across the United States and to Mexico, Canada and Costa Rica. The airline emphasizes Next-Level Care for its guests, along with providing low fares, award-winning customer service and sustainability efforts. Alaska is a member of oneworld. With the global alliance and the airline's additional partners, guests can travel to more than 1,000 destinations on more than 20 airlines while earning and redeeming miles on flights to locations around the world. Learn more about Alaska at newsroom.alaskaair.com and blog.alaskaair.com. Alaska Airlines and Horizon Air are subsidiaries of Alaska Air Group (NYSE: ALK).

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Alaska Air Group, Inc.
	Three Months Ended September 30,											Nine Months Ended September 30,
(in millions, except per-share amounts)	2021				2020				Change			2021				2020				Change
Operating Revenues:
Passenger revenue	$	1,774			$	572			210	%		$	3,785			$	2,362			60	%
Mileage Plan other revenue	120				84				43	%		332				266				25	%
Cargo and other	59				45				31	%		160				130				23	%
Total Operating Revenues	1,953				701				179	%		4,277				2,758				55	%
Operating Expenses:
Wages and benefits	578				495				17	%		1,581				1,579				—	%
Payroll support program wage offset	—				(398)				(100)	%		(914)				(760)				20	%
Variable incentive pay	42				42				—	%		109				65				68	%
Aircraft fuel, including hedging gains and losses	376				125				201	%		853				568				50	%
Aircraft maintenance	89				84				6	%		272				244				11	%
Aircraft rent	64				74				(14)	%		188				229				(18)	%
Landing fees and other rentals	141				109				29	%		414				323				28	%
Contracted services	62				36				72	%		167				138				21	%
Selling expenses	49				24				104	%		123				83				48	%
Depreciation and amortization	99				105				(6)	%		294				320				(8)	%
Food and beverage service	39				14				179	%		97				70				39	%
Third-party regional carrier expense	39				29				34	%		106				92				15	%
Other	126				89				42	%		348				310				12	%
Special items - impairment charges and other	(9)				121				(107)	%		5				350				(99)	%
Special items - restructuring charges	—				322			.	(100)	%		(12)				322				(104)	%
Special items - merger-related costs	—				1				(100)	%		—				5				(100)	%
Total Operating Expenses	1,695				1,272				33	%		3,631				3,938				(8)	%
Operating Income (Expense)	258				(571)				(145)	%		646				(1,180)				(155)	%
Nonoperating Income (Expense):
Interest income	6				7				(14)	%		19				23				(17)	%
Interest expense	(30)				(34)				(12)	%		(101)				(64)				58	%
Interest capitalized	3				4				(25)	%		9				8				13	%
Other - net	8				5				60	%		27				16				69	%
Total Nonoperating Expense	(13)				(18)				(28)	%		(46)				(17)				171	%
Income (Loss) Before Income Tax	245				(589)							600				(1,197)
Income tax expense (benefit)	51				(158)							140				(320)
Net Income (Loss)	$	194			$	(431)						$	460			$	(877)
Basic Income (Loss) Per Share:	$	1.55			$	(3.49)						$	3.69			$	(7.12)
Diluted Income (Loss) Per Share:	$	1.53			$	(3.49)						$	3.64			$	(7.12)
Shares Used for Computation:
Basic	125.250				123.647							124.846				123.255
Diluted	127.188				123.647							126.325				123.255
Cash dividend declared per share:	$	—			$	—						$	—			$	0.375

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
Alaska Air Group, Inc.
(in millions)	September 30, 2021				December 31, 2020
ASSETS
Current Assets
Cash and cash equivalents	$	495			$	1,370
Marketable securities	2,700				1,976
Total cash and marketable securities	3,195				3,346
Receivables - net	536				480
Inventories and supplies - net	62				57
Prepaid expenses, assets held-for-sale, and other current assets	208				123
Total Current Assets	4,001				4,006
Property and Equipment
Aircraft and other flight equipment	8,076				7,761
Other property and equipment	1,446				1,398
Deposits for future flight equipment	378				583
	9,900				9,742
Less accumulated depreciation and amortization	3,780				3,531
Total Property and Equipment - Net	6,120				6,211
Operating lease assets	1,370				1,400
Goodwill	1,943				1,943
Intangible assets - net	102				107
Other noncurrent assets	346				379
Other Assets	3,761				3,829
Total Assets	$	13,882			$	14,046

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions, except share amounts)	September 30, 2021				December 31, 2020
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	181			$	108
Accrued wages, vacation and payroll taxes	441				527
Air traffic liability	1,225				1,073
Other accrued liabilities	587				424
Deferred revenue	904				733
Current portion of operating lease liabilities	275				290
Current portion of long-term debt	425				1,138
Total Current Liabilities	4,038				4,293
Long-Term Debt, Net of Current Portion	2,225				2,357
Noncurrent Liabilities
Long-term operating lease liabilities, net of current portion	1,191				1,268
Deferred income taxes	501				407
Deferred revenue	1,446				1,544
Obligation for pension and postretirement medical benefits	558				665
Other liabilities	392				524
	4,088				4,408
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding	—				—
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2021 - 134,655,235 shares; 2020 - 133,567,534 shares, Outstanding: 2021 - 125,305,291 shares; 2020 - 124,217,590 shares	1				1
Capital in excess of par value	462				391
Treasury stock (common), at cost: 2021 - 9,349,944 shares; 2020 - 9,349,944 shares	(674)				(674)
Accumulated other comprehensive loss	(482)				(494)
Retained earnings	4,224				3,764
	3,531				2,988
Total Liabilities and Shareholders' Equity	$	13,882			$	14,046

SUMMARY CASH FLOW (unaudited)
Alaska Air Group, Inc.
(in millions)	Nine Months Ended September 30, 2021				Six Months Ended June 30, 2021(a)				Three Months Ended September 30, 2021(b)
Cash Flows from Operating Activities:
Net income	$	460			$	266			$	194
Non-cash reconciling items	322				221				101
Changes in working capital	119				520				(401)
Net cash provided by (used in) operating activities	901				1,007				(106)
Cash Flows from Investing Activities:
Property and equipment additions	(190)				(102)				(88)
Other investing activities	(753)				(968)				215
Net cash provided by (used in) investing activities	(943)				(1,070)				127
Cash Flows from Financing Activities:	(825)				(281)				(544)
Net decrease in cash and cash equivalents	$	(867)			$	(344)			$	(523)
Cash, cash equivalents, and restricted cash at beginning of period	1,386				1,386				1,042
Cash, cash equivalents, and restricted cash at end of the period	$	519			$	1,042			$	519

(a)	As reported in Form 10-Q for the second quarter of 2021.
(b)	Cash flows for the three months ended September 30, 2021, can be calculated by subtracting cash flows for the six months ended June 30, 2021, as reported in Form 10-Q for the second quarter 2021, from the nine months ended September 30, 2021.

OPERATING STATISTICS SUMMARY (unaudited)
Alaska Air Group, Inc.
	Three Months Ended September 30,						Nine Months Ended September 30,
	2021		2020		Change		2021		2020		Change
Consolidated Operating Statistics:(a)
Revenue passengers (000)	9,832		3,595		173.5%		23,211		14,012		65.7%
RPMs (000,000) "traffic"	11,592		3,817		203.7%		27,319		16,127		69.4%
ASMs (000,000) "capacity"	14,429		7,871		83.3%		38,238		27,483		39.1%
Load factor	80.3%		48.5%		31.8 pts		71.4%		58.7%		12.7 pts
Yield	15.30¢		14.99¢		2.1%		13.85¢		14.65¢		(5.5)%
RASM	13.54¢		8.90¢		52.1%		11.19¢		10.04¢		11.5%
CASMex(b)	9.21¢		14.00¢		(34.2)%		9.67¢		12.57¢		(23.1)%
Economic fuel cost per gallon(b)	$2.05		$1.32		55.3%		$1.93		$1.65		17.0%
Fuel gallons (000,000)	183		97		88.7%		477		344		38.7%
ASM's per gallon	78.8		81.3		(3.1)%		80.2		79.9		0.4%
Average number of full-time equivalent employees (FTE)	20,315		16,027		26.8%		18,819		18,112		3.9%
Mainline Operating Statistics:
Revenue passengers (000)	7,065		2,156		227.7%		16,367		9,736		68.1%
RPMs (000,000) "traffic"	10,122		2,958		242.2%		23,677		13,816		71.4%
ASMs (000,000) "capacity"	12,540		6,280		99.7%		33,004		23,339		41.4%
Load factor	80.7%		47.1%		33.6 pts		71.7%		59.2%		12.5 pts
Yield	14.08¢		13.56¢		3.8%		12.68¢		13.46¢		(5.8)%
RASM	12.66¢		8.14¢		55.5%		10.44¢		9.46¢		10.4%
CASMex(b)	8.45¢		13.88¢		(39.1)%		8.90¢		11.90¢		(25.2)%
Economic fuel cost per gallon(b)	$2.03		$1.31		55.0%		$1.91		$1.66		15.1%
Fuel gallons (000,000)	147		69		113.0%		380		270		40.7%
ASM's per gallon	85.3		91.0		(6.3)%		86.9		86.4		0.6%
Average number of FTE's	15,116		12,032		25.6%		13,870		13,730		1.0%
Aircraft utilization	10.2		7.3		39.7%		9.6		8.3		15.7%
Average aircraft stage length	1,313		1,244		5.5%		1,313		1,263		4.0%
Operating fleet(d)	210		217		(7) a/c		210		217		(7) a/c
Regional Operating Statistics:(c)
Revenue passengers (000)	2,767		1,439		92.3%		6,843		4,276		60.0%
RPMs (000,000) "traffic"	1,470		859		71.1%		3,642		2,311		57.6%
ASMs (000,000) "capacity"	1,889		1,592		18.7%		5,235		4,143		26.4%
Load factor	77.8%		54.0%		23.8 pts		69.6%		55.8%		13.8 pts
Yield	23.72¢		19.89¢		19.3%		21.47¢		21.72¢		(1.2)%
RASM	19.26¢		11.91¢		61.7%		15.80¢		13.24¢		19.3%
Operating fleet	94		94		— a/c		94		94		— a/c

(a)	Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.
(b)	See a reconciliation of this non-GAAP measure and Note A for a discussion of the importance of this measure to investors in the accompanying pages.
(c)	Data presented includes information for flights operated by Horizon and third-party carriers.
(d)	Excludes all aircraft removed from operating service.

Given the unusual nature of 2020, we believe that some analysis of specific financial and operational results compared to 2019 provides meaningful insight. The table below includes comparative results from 2021 to 2019.

FINANCIAL INFORMATION AND OPERATING STATISTICS - 2019 RESULTS (unaudited)
Alaska Air Group, Inc.
	Three Months Ended September 30,											Nine Months Ended September 30,
	2021				2019				Change			2021				2019				Change
Passenger revenue	$	1,774			$	2,211			(20)	%		$	3,785			$	6,038			(37)	%
Mileage plan other revenue	120				118				2	%		332				346				(4)	%
Cargo and other	59				60				(2)	%		160				169				(5)	%
Total operating revenues	$	1,953			$	2,389			(18)	%		$	4,277			$	6,553			(35)	%
Operating expense, excluding fuel and special items	$	1,328			$	1,476			(10)	%		$	3,699			$	4,295			(14)	%
Economic fuel	376				486				(23)	%		853				1,408				(39)	%
Special items	(9)				5				(280)	%		(921)				39				NM
Total operating expenses	$	1,695			$	1,967			(14)	%		$	3,631			$	5,742			(37)	%
Consolidated Operating Statistics(a):
Revenue passengers (000)	9,832				12,574				(22)	%		23,211				35,018				(34)	%
RPMs (000,000) "traffic"	11,592				15,026				(23)	%		27,319				42,113				(35)	%
ASMs (000,000) "capacity"	14,429				17,519				(18)	%		38,238				50,006				(24)	%
Load Factor	80.3%				85.8%				(5.5)	pts		71.4%				84.2%				(12.8)	pts
Yield	15.30¢				14.71¢				4	%		13.85¢				14.34¢				(3)	%
RASM	13.54¢				13.64¢				(1)	%		11.19¢				13.10¢				(15)	%
CASMex	9.21¢				8.43¢				9	%		9.67¢				8.59¢				13	%
FTEs	20,315				22,247				(9)	%		18,819				22,000				(14)	%

(a)	2019 comparative operating statistics have been recalculated using the information presented above, and as filed in our third quarter 2019 Form 10-Q

OPERATING SEGMENTS (unaudited)
Alaska Air Group, Inc.
	Three Months Ended September 30, 2021
(in millions)	Mainline				Regional				Horizon				Consolidating & Other(a)				Air Group Adjusted(b)				Special Items(c)				Consolidated
Operating Revenues
Passenger revenues	$	1,425			$	349			$	—			$	—			$	1,774			$	—			$	1,774
CPA revenues	—				—				107				(107)				—				—				—
Mileage Plan other revenue	105				15				—				—				120				—				120
Cargo and other	58				—				—				1				59				—				59
Total Operating Revenues	1,588				364				107				(106)				1,953				—				1,953
Operating Expenses
Operating expenses, excluding fuel	1,060				288				93				(113)				1,328				(9)				1,319
Economic fuel	299				77				—				—				376				—				376
Total Operating Expenses	1,359				365				93				(113)				1,704				(9)				1,695
Nonoperating Income (Expense)
Interest income	7				—				—				(1)				6				—				6
Interest expense	(25)				—				(6)				1				(30)				—				(30)
Interest capitalized	2				—				—				1				3				—				3
Other - net	8				—				—				—				8				—				8
Total Nonoperating Expense	(8)				—				(6)				1				(13)				—				(13)
Income (Loss) Before Income Tax	$	221			$	(1)			$	8			$	8			$	236			$	9			$	245
	Three Months Ended September 30, 2020
(in millions)	Mainline				Regional				Horizon				Consolidating & Other(a)				Air Group Adjusted(b)				Special Items(c)				Consolidated
Operating Revenues
Passenger revenues	$	401			$	171			$	—			$	—			$	572			$	—			$	572
CPA revenues	—				—				95				(95)				—				—				—
Mileage Plan other revenue	65				19				—				—				84				—				84
Cargo and other	45				—				—				—				45				—				45
Total Operating Revenues	511				190				95				(95)				701				—				701
Operating Expenses
Operating expenses, excluding fuel	872				248				78				(97)				1,101				46				1,147
Economic fuel	90				38				—				—				128				(3)				125
Total Operating Expenses	962				286				78				(97)				1,229				43				1,272
Nonoperating Income (Expense)
Interest income	8				—				—				(1)				7				—				7
Interest expense	(28)				—				(6)				—				(34)				—				(34)
Interest capitalized	4				—				—				—				4				—				4
Other - net	4				—				—				1				5				—				5
Total Nonoperating Income (Expense)	(12)				—				(6)				—				(18)				—				(18)
Income (Loss) Before Income Tax	$	(463)			$	(96)			$	11			$	2			$	(546)			$	(43)			$	(589)

	Nine Months Ended September 30, 2021
(in millions)	Mainline				Regional				Horizon				Consolidating & Other(a)				Air Group Adjusted(b)				Special Items(c)				Consolidated
Operating Revenues
Passenger revenues	$	3,003			$	782			$	—			$	—			$	3,785			$	—			$	3,785
CPA revenues	—				—				322				(322)				—				—				—
Mileage Plan other revenue	287				45				—				—				332				—				332
Cargo and other	157				—				—				3				160				—				160
Total Operating Revenues	3,447				827				322				(319)				4,277				—				4,277
Operating Expenses
Operating expenses, excluding fuel	2,937				839				272				(349)				3,699				(921)				2,778
Economic fuel	726				195				—				—				921				(68)				853
Total Operating Expenses	3,663				1,034				272				(349)				4,620				(989)				3,631
Nonoperating Income (Expense)
Interest income	20				—				—				(1)				19				—				19
Interest expense	(86)				—				(16)				1				(101)				—				(101)
Interest capitalized	8				—				—				1				9				—				9
Other - net	27				—				—				—				27				—				27
Total Nonoperating Expense	(31)				—				(16)				1				(46)				—				(46)
Income (Loss) Before Income Tax	$	(247)			$	(207)			$	34			$	31			$	(389)			$	989			$	600
	Nine Months Ended September 30, 2020
(in millions)	Mainline				Regional				Horizon				Consolidating & Other(a)				Air Group Adjusted(b)				Special Items(c)				Consolidated
Operating Revenues
Passenger revenues	$	1,860			$	502			$	—			$	—			$	2,362			$	—			$	2,362
CPA revenues	—				—				281				(281)				—				—				—
Mileage Plan other revenue	219				47				—				—				266				—				266
Cargo and other	128				—				—				2				130				—				130
Total Operating Revenues	2,207				549				281				(279)				2,758				—				2,758
Operating Expenses
Operating expenses, excluding fuel	2,777				727				238				(289)				3,453				(83)				3,370
Economic fuel	448				120				—				—				568				—				568
Total Operating Expenses	3,225				847				238				(289)				4,021				(83)				3,938
Nonoperating Income (Expense)
Interest income	33				—				—				(10)				23				—				23
Interest expense	(58)				—				(16)				10				(64)				—				(64)
Interest capitalized	8				—				—				—				8				—				8
Other - net	16				—				—				—				16				—				16
Total Nonoperating Income (Expense)	(1)				—				(16)				—				(17)				—				(17)
Income (Loss) Before Income Tax	$	(1,019)			$	(298)			$	27			$	10			$	(1,280)			$	83			$	(1,197)

(a)	Includes consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units.
(b)	The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocation and excludes certain charges. See Note A in the accompanying pages for further information.
(c)	Includes payroll support program wage offsets, special items and mark-to-market fuel hedge accounting adjustments.

GAAP TO NON-GAAP RECONCILIATIONS (unaudited)
Alaska Air Group, Inc.
CASM Excluding Fuel and Special Items Reconciliation
	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Consolidated:
CASM	11.75	¢		16.16	¢		9.50	¢		14.33	¢
Less the following components:
Payroll support program wage offset (benefit)	—			(5.06)			(2.39)			(2.77)
Aircraft fuel, including hedging gains and losses	2.60			1.59			2.24			2.07
Special items - impairment charges and other(a)	(0.06)			1.53			0.01			1.27
Special items - restructuring charges(b)	—			4.09			(0.03)			1.17
Special items - merger-related costs	—			0.01			—			0.02
CASM excluding fuel and special items	9.21	¢		14.00	¢		9.67	¢		12.57	¢
Mainline:
CASM	10.77	¢		16.80	¢		8.26	¢		13.56	¢
Less the following components:
Payroll support program wage offset (benefit)	—			(5.56)			(2.61)			(2.89)
Aircraft fuel, including hedging gains and losses	2.39			1.43			1.99			1.92
Special items - impairment charges and other(a)	(0.07)			1.93			0.02			1.24
Special items - restructuring charges(b)	—			5.10			(0.04)			1.37
Special items - merger-related costs	—			0.02			—			0.02
CASM excluding fuel and special items	8.45	¢		13.88	¢		8.90	¢		11.90	¢

(a)	Special items - impairment charges and other in the three and nine months ended September 30, 2021 are primarily comprised of updated estimates of cost associated with leased aircraft that have been retired and removed from the operating fleet but not yet returned to the lessor.
(b)	Special items - restructuring charges in the nine months ended September 30, 2021 represent adjustments to total cost for pilot incentive leaves as a result of updated recall timing from what was previously anticipated due to schedule changes, training limitations and other factors.

Fuel Reconciliation
	Three Months Ended September 30,
	2021								2020
(in millions, except for per-gallon amounts)	Dollars				Cost/Gallon				Dollars				Cost/Gallon
Raw or "into-plane" fuel cost	$	397			$	2.16			$	123			$	1.27
Losses (gains) on settled hedges	(21)				(0.11)				5				0.05
Consolidated economic fuel expense	376				2.05				128				1.32
Mark-to-market fuel hedge adjustment	—				—				(3)				(0.03)
GAAP fuel expense	$	376			$	2.05			$	125			$	1.29
Fuel gallons	183								97
	Nine Months Ended September 30,
	2021								2020
(in millions, except for per gallon amounts)	Dollars				Cost/Gallon				Dollars				Cost/Gallon
Raw or "into-plane" fuel cost	$	949			$	1.99			$	553			$	1.61
Losses (gains) on settled hedges	(28)				(0.06)				15				0.04
Consolidated economic fuel expense	$	921			$	1.93			$	568			$	1.65
Mark-to-market fuel hedge adjustment	(68)				(0.14)				—				—
GAAP fuel expense	$	853			$	1.79			$	568			$	1.65
Fuel gallons	477								344

Debt-to-capitalization, adjusted for operating leases
(in millions)	September 30, 2021				December 31, 2020
Long-term debt, net of current portion	$	2,225			$	2,357
Capitalized operating leases	1,466				1,558
COVID-19 related borrowings(a)	—				734
Adjusted debt, net of current portion of long-term debt	3,691				4,649
Shareholders' equity	3,531				2,988
Total Invested Capital	$	7,222			$	7,637
Debt-to-capitalization ratio, including operating leases	51		%		61		%

(a)	To best reflect our leverage we included the remaining short-term borrowings stemming from the COVID-19 pandemic which are classified as current liabilities in the consolidated balance sheets. As of September 30, 2021, no such borrowings were outstanding.

Adjusted net debt to earnings before interest, taxes, depreciation, amortization and special items
(in millions)	September 30, 2021				December 31, 2020
Current portion of long-term debt	$	425			$	1,138
Current portion of operating lease liabilities	275				290
Long-term debt, net of current portion	2,225				2,357
Long-term operating lease liabilities, net of current portion	1,191				1,268
Total adjusted debt	4,116				5,053
Less: Cash and marketable securities	(3,195)				(3,346)
Adjusted net debt	$	921			$	1,707
(in millions)	Twelve Months Ended September 30, 2021				Twelve Months Ended December 31, 2020
GAAP Operating Income (Loss)(a)	$	51			$	(1,775)
Adjusted for:
Payroll Support Program grant wage offset and special items	(767)				71
Mark-to-market fuel hedge adjustments	(76)				(8)
Depreciation and amortization	394				420
Aircraft rent	258				299
EBITDAR	$	(140)			$	(993)
Adjusted net debt to EBITDAR	(6.6x)				(1.7x)

(a)	Operating income (loss) can be reconciled using the trailing twelve month operating income as filed quarterly with the SEC.

Note A: Pursuant to Regulation G, we are providing reconciliations of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. We believe that consideration of these non-GAAP financial measures may be important to investors for the following reasons:

• By eliminating fuel expense and certain special items (including the payroll support program wage offset, impairment and restructuring charges and merger-related costs) from our unit metrics, we believe that we have better visibility into the results of operations as we focus on cost-reduction initiatives emerging from the COVID-19 pandemic. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.
• Cost per ASM (CASM) excluding fuel and certain special items, such as the payroll support program wage offset, impairment and restructuring charges and merger-related costs, is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.
• Adjusted income before income tax (and other items as specified in our plan documents) is an important metric for the employee incentive plan, which covers the majority of Air Group employees.
• CASM excluding fuel and certain special items is a measure commonly used by industry analysts, and we believe it is the basis by which they have historically compared our airline to others in the industry. The measure is also the subject of frequent questions from investors.
• Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of these items as noted above. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.
• Although we disclose our passenger unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.

GLOSSARY OF TERMS

Adjusted net debt - long-term debt, including current portion, plus capitalized operating leases, less cash and marketable securities

Adjusted net debt to EBITDAR - represents net adjusted debt divided by EBITDAR (trailing twelve months earnings before interest, taxes, depreciation, amortization, special items and rent)

Aircraft Utilization - block hours per day; this represents the average number of hours per day our aircraft are in transit

Aircraft Stage Length - represents the average miles flown per aircraft departure

ASMs - available seat miles, or "capacity"; represents total seats available across the fleet multiplied by the number of miles flown

CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items

CASMex - operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control

Debt-to-capitalization ratio - represents adjusted debt (long-term debt plus capitalized operating lease liabilities) divided by total equity plus adjusted debt

Diluted Earnings per Share - represents earnings per share (EPS) using fully diluted shares outstanding

Diluted Shares - represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised

Economic Fuel - best estimate of the cash cost of fuel, net of the impact of our fuel-hedging program

Load Factor - RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers

Mainline - represents flying Boeing 737, Airbus 320 and Airbus 321neo family jets and all associated revenues and costs

Productivity - number of revenue passengers per full-time equivalent employee

RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan and other ancillary revenue; represents the average total revenue for flying one seat one mile

Regional - represents capacity purchased by Alaska from Horizon and SkyWest. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon and SkyWest under the respective capacity purchased arrangement (CPAs). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, other administrative costs incurred by Alaska and on behalf of Horizon.

RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Yield - passenger revenue per RPM; represents the average revenue for flying one passenger one mile

 

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SOURCE Alaska Air Group

FAQ

What were Alaska Air Group's Q3 2021 earnings?

Alaska Air Group reported a net income of $194 million, or $1.53 per share, in Q3 2021.

How did Alaska Air Group perform compared to Q3 2020?

In Q3 2021, Alaska Air Group recovered from a net loss of $431 million in Q3 2020.

What is the debt-to-capitalization ratio for Alaska Air Group?

As of September 30, 2021, the debt-to-capitalization ratio stood at 51%.

What new operational developments were announced by Alaska Air Group?

Alaska Air Group exercised options for 12 Boeing 737-9 aircraft and opened a new lounge in San Francisco.

What ESG initiatives has Alaska Air Group undertaken recently?

Alaska appointed Adrienne Lofton from Google to its board and launched Alaska Star Ventures for carbon neutrality.